IN THE SOUTHEND COUNTY COURT CASE NO 0BQ 12347 HHJ MOLONEY QC BETWEEN IRVING BENJAMIN GRAHAM Appellant And SAND MARTIN HEIGHTS RESIDENTS COMPANY LIMITED Respondent JUDGMENT [handed down at Southend Crown Court on 4 November 2011] ( 1. Introduction 1.1 This is an appeal from the decision of District Judge Collier, given at Basildon on 15 February 2011, as to the costs of the small claim she had been trying. The Claimant/Respondent is the management company of an apartment block in which the Defendant/Appellant owns a leasehold flat. The underlying claim was for 1,355 arrears of service charge, which was not seriously disputed. The real dispute to which this appeal relates concerns the costs of recovering those arrears; the lease provided, as is not uncommon, that all expenses incurred in collecting arrears should be paid by the leaseholder to the management company. The District Judge gave effect to that provision by awarding those costs, and indeed doing so on the indemnity basis, her judgment being for 994.95 on the claim and 6,807.18 costs. 1.2 The appeal raises an interesting and important point of principle, indeed of jurisdiction, which the Appellant says has never been clearly determined. The special costs regime applicable to the small claims track provides, in essence, that no legal costs are recoverable in respect of small claims cases. How then can the District Judge have been entitled to award any such costs at all, let alone costs so far in excess of the basic sum claimed and indeed of the small claims limit of 5,000? The Respondent s answer, accepted by the District Judge, is that the small claims costs rules do not apply when there is a contractual entitlement to the costs; this is said to have been decided by a recent High Court decision, that of Roderick
Evans J in Shaw v. Nine Regions Ltd [2009] EWHC 3553 (QB), which the District Judge followed and which if applicable would of course bind me. 1.3 By its Notice, the Respondent raises an alternative ground for upholding the District Judge s decision, namely that the Appellant had behaved unreasonably so as to expose himself to costs under CPR 27(14)2(g). I shall address this point after considering the point of principle. 2. Contractual Provision as to Costs 2.1 The leading case on the general question of the relationship between an express contractual provision, purporting to entitle a party to the costs of legal proceedings, and the powers of the court to award such costs remains Church Commissioners v. Ibrahim [1997] 1 EGLR 13, CA, (9 February 1996). Of course, this decision predated the introduction of CPR and of the present small claims procedure; but it does establish certain basic principles which are not invalidated by those later developments. 2.2 Specifically, Ibrahim decides: a. that a court order for the payment of costs of proceedings by one party to another is always based, not on any contract between them, but on s.51 Supreme Court Act 1981 (still in force as the Senior Courts Act 1981); b. that such an order is therefore always ultimately discretionary under s.51(1) and (3), the court not being obliged to enforce the contract however clear its terms; c. but that the successful litigant s contractual right to recover the costs of any proceedings to enforce his primary contractual rights is a highly relevant factor when it comes to making a costs order; he is not in my view to be deprived of his contractual rights to costs where he has claimed them unless there is good reason to do so (per Roch LJ at 14J); d. the principle at (c) applies both to the making of a costs order in his favour and to the extent that costs are to be paid; if the parties have agreed the basis of taxation it would be an improper exercise of the court s discretion to direct the taxation on some other basis unless satisfied that there had been some conduct on the part of the [claimant] disentitling him to costs or to costs on the agreed basis (per Vinelott J in Gomba Holdings v. Minories (No.2) [1993] Ch 171, CA, approved by Roch LJ supra). 2.3 Those were in substance the principles which the District Judge applied, and if she had jurisdiction to do so then it is difficult to see how her decision could properly be set aside (subject to the separate unreasonableness point raised by the Respondent s Notice).
3. CPR and the Small Claims Track 3.1 The Appellant s case is based on the costs provisions of CPR, but begins with the first clause of s. 51(1) SCA 1981, emphasised below: Subject to the provisions of this or any other enactment and to rules of court, the costs of and incidental to all proceedings shall be in the discretion of the court. In other words, the general statutory discretion relied on in Ibrahim may be fettered by rules of court. 3.2 The specific rule relied on here is CPR 27.14, which so far as material provides as follows (my emphasis): 1. This rule applies to any case which has been allocated to the small claims track, unless paragraph (5) applies [it deals with agreement to apply the fast-track costs regime and is not relevant here]. 2. The court may not order a party to pay a sum to another party in respect of that other party s costs, fees and expenses, including those relating to an appeal, except: [a.-f. various specific items listed, not relevant here]; g. such further costs as the court may assess by the summary procedure and order to be paid by a party who has behaved unreasonably. 3. A party s rejection of an offer in settlement will not of itself constitute unreasonable behaviour under paragraph 2(g) but the court may take it into consideration when it is applying the unreasonableness test. 3.3 The Appellant argues that 27.14(2) above could not be clearer, and (as envisaged and authorised by s.51 (1) supra) deprives the small claims court of any power or discretion to award the costs of representation in issue here; the fact of a contract is immaterial because, as decided in Ibrahim, it is not the contract but the court s statutory powers which ultimately determine whether and to what extent costs may be awarded. 3.4 There is a further potentially relevant provision of CPR, on which the Respondent relies. It is CPR 43.2 (2) b, which states: The costs to which the rules in Parts 44 to 48 apply include: a. the following costs where those costs may be assessed by the court: i. costs of proceedings before an arbitrator or umpire;
ii. costs of proceedings before a tribunal or other statutory body; and iii. costs payable by a client to his solicitor; and b. costs which are payable by one party to another party under the terms of a contract, where the court makes an order for an assessment of those costs. 3.5 It is the Respondent s ingenious contention that the express inclusion of such contractual costs into Parts 44 to 48 must mean that they are to be excluded from the provisions of Part 27, which makes no reference to them. But when one considers sub-rule (2) (b) in the context of sub-rule (2) as a whole, two things become clear: - that sub-rule (2) is not concerned with the jurisdiction to make an order for costs, but rather with the assessment of costs once an order has been made; - and that in particular it is concerned to make clear that the same principles apply to all assessment of costs by the court, even when the costs are not those of proceedings before the court itself but costs arising from another source, be it arbitration, tribunal, solicitor and own client, or a private contract. (It may be that, in the light of Ibrahim supra, sub-rule (2) (b) was not strictly necessary; but I note that the contractual costs covered by (2) (b) are not confined to costs of proceedings and might well therefore also include other types of legal costs outside the scope of s. 51 altogether.) I therefore conclude that this provision is of no assistance to me in determining the scope and meaning of CPR 27.14 (2) or the jurisdiction of the small claims court to award contractual costs. 4. Previous Court Decisions 4.1 Counsel have drawn my attention to three previous decisions which bear on the point at issue; in chronological order they are: HFC Bank v. JMC Holidays [2003] CLY 338 (HHJ O Brien) Shaw v. Nine Regions [2009] EWHC 3553 (Roderick Wood J) Salmons Brook v. Adeyanju 15.12.10 unreported (HHJ Dedman). 4.2 In HFC Bank, of which regrettably we only have a brief note, a holidaymaker brought a claim against a travel company in respect of a holiday bought with an HFC credit card. The Bank was joined under s.75 Consumer Credit Act 1974 and the claim allocated to the small claims track. When the holidaymaker s claim was settled, the Bank applied for an order that the company should pay its costs. The Judge allowed the claim, on the basis that the Act
gave the Bank a separate cause of action for its costs incurred in defending the debtor s claim, which could be allowed despite the provisions of rule 27.14. 4.3 There is an obvious analogy, favourable to the Respondent, with the District Judge s decision here. How persuasive it is depends on the degree of similarity between the claims to costs under the CCA and under a contract like the present. S. 75 (2) provides as follows: Subject to any agreement between them, the creditor shall be entitled to be indemnified by the supplier for the loss suffered by the creditor in satisfying his liability under subsection (1) [i.e. to the debtor] including costs reasonably incurred by him in defending proceedings instituted by the debtor. Three points of distinction are apparent: a. The s. 75 creditor is entitled to an indemnity for his loss, in which the costs are but one possible element; this is plainly the language of rights, and of a separate cause of action, whereas Ibrahim makes clear that the costs contract gives no such rights but is only a factor in a discretion. b. The s. 75 claim does not arise from a private contract, but from a statute, and one predating the 1981 Act. Just as s.51(1) has an exception for rules of court, so it has one for any other enactment ; the s.75 claim is outside s.51 and is not discretionary, or indeed an instance of the court s ordinary costs jurisdiction at all. c. The costs in question under s. 75(2) are not, as here, the costs of the Claimant s claim against the Defendant; they are confined to the Bank s costs of defending the original debtor s claim. It might well be that, if the claim for the s.75 indemnity were tried as a small claim, the Bank would recover its costs in respect of the debtor, but not its costs of the indemnity claim against the travel company; the brief CLY report refers only to the costs towards the debtor, not the costs of the hearings before the District Judge and Judge O Brien. 4.4 For the above reasons I respectfully conclude that HFC Bank was rightly decided, but is distinguishable and does not assist in deciding the questions before me. 4.5 I was provided with a copy of Roderick Wood J s judgment in Nine Regions, but confined to his decision on costs. The claimant, who was in person, had taken out a loan from the defendant, whose standard terms included a right to repayment of legal costs in respect of court action for repayment of the loan. The claimant sued for a declaration, and the defendant counterclaimed successfully for repayment. The Recorder (who unusually was hearing a small claim, and who had refused a late application by the defendant to reallocate to the fast-track) gave judgment in favour of the defendant, but refused it its costs on the ground that it was a small claim. The claimant (who was in person at both stages) appealed
both liability and costs. He failed on liability, but took two points on costs. One, to which the learned Judge devoted most of his short judgment, was that the costs clause was void under the Consumer Contracts Regulations; this failed, but has no relevance to the present case. The other was the present point, that costs are not recoverable in a small claims case. The claimant does not appear to have put forward any positive arguments in support of his position. The defendant cited Ibrahim, which the learned Judge appears to have accepted as applicable, since all he said by way of decision in relation to the small claims point was, in the last paragraph of his judgment: There is in my judgment no good reason why the defendant should be kept out of his statutory [sic] costs and therefore I award the costs both in this court and in the court below to the defendant. (This is of course an application of Roch LJ s test in Ibrahim, quoted at paragraph 2.2c above.) 4.6 The judgment refers at paragraph 6 to a submission that the claimant was exposed to costs because of his unreasonableness; but there is no clear finding to that effect, and it is not given as a reason for the costs decision. The Appellant also argued before me that the learned Judge might have implicitly allowed an appeal against the Recorder s failure to reallocate to the fast-track, and then allowed costs on that basis; but there is no basis whatever in the judgment for that suggestion. 4.7 It is clear that the learned Judge did decide that contractual costs were recoverable in a small claims case, notwithstanding the special costs regime, and so ordered. As a recent High Court decision, it is not merely entitled to the highest respect, but is binding on me unless it was decided per incuriam, that is, without regard to authority binding upon the learned Judge which would (not might) have led him to a different conclusion. 4.8 In the present case the authority in question could only be the specific provisions of CPR 27.14 itself. CPR 27 is nowhere mentioned in the judgment, and the apparently mandatory wording of 27.14(2) is not referred to. The claimant was a litigant in person who appears to have addressed his mind to a wholly different issue. The only case authority referred to in the judgment is Ibrahim, which predates the CPR and does not really touch on this problem. Unlike the learned Judge I have had the benefit of full argument from two counsel, who have not only taken me in detail through the applicable statutes, rules and cases but also analysed the practical implications of the alternative positions. As will appear below, the result is that I have reached a firm and clear conclusion that contractual costs cannot be awarded in a small claims case; and I hope and believe that if Roderick Evans J had had the same advantages he would have reached the same conclusion. With respect and
trepidation, therefore, I propose to decide this case on first principles and without treating Nine Regions as determinative of the issue. 4.9 In that light I can deal shortly with Salmons Brook, in which on this point HHJ Dedman did consider himself bound by Nine Regions, though he acknowledged that there might have been further detailed discussion in the judgment concerning the impact of the Small Claims Track. (I note also his comment at the beginning of his judgment that Mr Bumble might have been confirmed in his view of the law if he had seen, as in that case, a judgment for 17 pence with costs of over 20,000.) Having reached a different conclusion about Nine Regions, I cannot gain much further assistance from Salmons Brook. 5. Discussion 5.1 The Respondent points out that it does have a contractual right to its costs, which should not be extinguished by a purely procedural factor such as the choice of track. Further, if the Appellant s case were correct, then whenever a lease or other agreement contained a costs clause the claimant would for practical purposes be debarred from using the small claims procedure, even though the case might otherwise be suitable in terms of value and simplicity for such disposal. 5.2 The Appellant refers me to CPR 26 PD 8.1, which I consider very significant in this case, and which is, so far as relevant, as follows: 8. The Small Claims Track Allocation and Case Management 8.1 Allocation 1(a) The small claims track is intended to provide a proportionate procedure by which most straightforward claims with a financial value of not more than 5,000 can be decided without the need for substantial pre-hearing preparation and the formalities of a traditional trial and without incurring large legal costs (b) The procedure laid down in Part 27 for the preparation of the case and the conduct of the hearing are designed to make it possible for a litigant to conduct his own case without legal representation if he wishes. To that end, Rule 27.14, set out above, does not debar a party from using a lawyer if he wishes, but does prohibit him from recovering his costs of legal representation (in the absence of unreasonableness on the other side), a prohibition which would in most cases deter a commercially-minded claimant from professional representation.
5.3 If the Respondent were correct as to the recoverability of the costs of representation by reason of the contract even in a small claims case, then the consequences would be as follows: a. There would be little to deter such a claimant from deploying the full panoply of legal representation in such a case (except the risk that some of its costs might be disallowed on assessment as unreasonable even on the indemnity basis which would normally be applied in a contractual costs case). This would of itself be contrary to the cheap and cheerful ethos of the small claims court. b. Faced with lawyers and the risk of heavy costs liability even in the small claims court, the defendant might want to seek representation too. But (and this point impresses me greatly) if he did so, then even if successful he would be debarred by Rule 27.14 from recovering his costs of representation from the losing claimant, and would have no countervailing contractual provision to pray in aid. At the best, there would be no order as to costs. c. It follows that, if contractual costs claims are to be heard in the small claims court, there will be an inherent and gross inequality of arms in favour of the claimant, which appears to me to raise serious human rights concerns under Article 6. (It might be said that the defendant cannot complain at the consequences of a contract he freely signed; but the inequality is not the result of the contract, it results from allocation to a track which debars him from recovering his costs if successful, as the contract would otherwise permit.) d. It is also relevant that, in most cases including the present, if the matter goes to trial then the combined costs and damages payable are likely well to exceed the 5,000 small claims limit; if the costs are to be viewed as part of the contractual debt, this is a further reason against allocation of such cases to the small claims track. 5.4 In the light of the above considerations, it appears to me that the answers to the Respondent s points set out at 5.1 above are as follows: a. As Ibrahim makes clear, a contractual costs clause in respect of the costs of proceedings is not to be interpreted as conferring an ordinary contractual right to such costs; it is a matter for the discretion of the court hearing those proceedings. If a claimant elects or accepts allocation to the small claims track, then he is waiving his claim for such costs, since the small claims judge has no discretion to award them. If he wants such costs, he must go to a court which can give him them. (It was suggested by the Respondent that this appeal was in a sense pointless, because it could always commence a second action for the costs of this action as a contractual debt. Reliance was placed on the Court of Appeal s decisions in Union Discount v. Zoller [2001]
EWCA Civ 1755 and Carroll v. Kynaston [2010] EWCA Civ 1404. Accepting, as those cases indicate, that it may be possible to commence such an action in respect of the costs of earlier proceedings when there was no possibility of recovering them in the earlier proceedings (e.g. because they were foreign or criminal proceedings to which our normal civil costs principles do not apply), it appears to me that there would be a strong counterargument that such a claim was inappropriate and an abuse of process here, because the costs could have been recovered if the claimant had used the fast-track. In any case, I do not think that the possible outcome of those hypothetical future proceedings should affect my decision on the questions actually before me.) b. For the reasons set out above, I do not consider that such a claimant can legitimately complain of being deprived of access to the small claims track, when it would be inappropriate and unfair for its claim to be heard there. c. The Respondent put forward the further point that it would be unfair to the leaseholders as a whole to allow this appeal, since the effect would be that the unrecovered costs would fall on them. I do not consider this to be a point of general application, since for the future such costs will if appropriate be recoverable via the fast track. In the particular case it is a matter of contract between the leaseholders and the management company, whether these costs are payable by them or not, and it does not seem to me to be an area I can or should enter. 6. Conclusions On the point of principle, I therefore conclude: a. In a case allocated to the small claims track (and in the absence of unreasonableness) there is no jurisdiction to award the winning party his costs of legal representation in the proceedings. b. This absence of jurisdiction is not affected or cured by the existence of a provision in the contract relied on, purporting to entitle the party to his costs of the proceedings. c. For these reasons the District Judge (through no fault of her own) was wrong in law to conclude that she had such jurisdiction and to make the order appealed against. I add the following guidance to District Judges. The existence of such a contractual provision will, in accordance with Ibrahim, be a powerful factor in the court s decision on allocation; if a party indicates in the listing questionnaire his wish to rely on such a provision, then the court should ordinarily exercise its discretion to allocate the case to the fast-track, in which the costs of representation are recoverable.
7. Unreasonableness 7.1 As stated above, Rule 27.14 (2) (g) does permit the small claims court to award further costs against a party who has behaved unreasonably. The Respondent s Notice contends that the Appellant did behave unreasonably, the particulars given in its Skeleton Argument being: a. that, having disputed the claim to pre-action legal costs, he advanced no substantive defence to them at the trial; b. that he insisted for no good reason that the Respondent s solicitor s paralegal, Ms Waddilove, should attend for cross-examination. 7.2 The issue of unreasonableness was not expressly raised at the hearing before the District Judge, because it effectively proceeded on the basis that the Claimant was entitled to its costs anyway by virtue of the contract. The District Judge therefore did not express a view on it, though she did reject sharply any contention that the Claimant had behaved unreasonably in pursuing this lawful claim which was defended right up until the full trial this afternoon. 7.3 The Appellant s response is that he was entitled to put the Respondent to proof of its claim, and that although he did ask Ms Waddilove to attend it was the Respondent s voluntary decision to bring her. It is also relevant that by the time of trial he had in effect paid the service charge owing, and that he succeeded in reducing somewhat the pre-action costs recoverable. 7.4 I accept that conduct of the sort complained of here is capable, on the basis of the authorities and examples summarised in the White Book notes to Rule 27.14, of amounting to unreasonable behaviour for this purpose. I also note that the Defendant/Appellant is in fact a practising barrister, though relatively junior and in the criminal field. However, having read the transcript of the trial, including his questioning of Ms Waddilove about the steps he had taken to ascertain the amount claimed and to agree terms for payment, I do not consider that his conduct of his defence in this case was so plainly unreasonable as to expose him to a costs liability he would not otherwise have faced, and I do not accede to the Respondent s request to uphold the District Judge s decision in whole or part on these separate grounds.
8. Decision For the above reasons I shall allow the appeal and set aside the District Judge s order as to costs (with the exception of such costs as would have been payable on a small claim case under 27.14 (2) a-f). ++++++++++++++++++++++++++++++++++++++++++++++++